Need Advice to maximize funds for new home build

[Jennifer Grbich]

Hello, I need advice. My friend bought 2 acres of land in Auburn, CA with plans in place to build a house. He's a GC. He also bought a SFH next to it that sits on ~5 acres in duress. Long story short, he wants to build a new home that would serve as his primary on the 5 acre lot. Our current plan is live in the current home until the new one is "livable"... then make the current one an ADU and rent it out. Both dwellings will be on the same lot at different ends, far enough from each other.

Initially, he was going to build on the 2 acre lot but the 5 acre has a better view.  So he's going to sell the 2 acre lot which would net hopefully about $160-170 after fees.

Firstly, do we have to make the current one an ADU? I didn't understand that part of his thinking unless we can't have 2 SFH on a property? Can we keep it as is and still rent it out as a sfh? He mentioned that he would have to take the kitchen out in order for it to be an ADU? Don't people need to eat?

Back to finance question, would it be a better decision to take the funds from the sale of the 2 acre lot and pay off the current mortgage (~$150k) and live in the current home for a year or so (in hopes that interest rates will go down) then refinance that take out $400k from equity (~$750k) to build new house? OR keep the current mortgage and use the funds from profit along with taking out a HELOC against current home to build new one? I'm not sure what other options we have and would love to hear. We obviously want to maximize funds to build new home without getting in over our heads. I think current interest rate of mortgage is around 6% but I can find out to be certain, he bought in 2022.